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CORPORATE GOVERNANCE

Overview

The evolution of Corporate Governance in India began in early 90s. TheThe evolution of Corporate Governance in India began in early 90s. The starting point was the recommendations of the Cadbury Committee Reportstarting point was the recommendations of the Cadbury Committee Report after which followed various committees, leading to a formal Corporateafter which followed various committees, leading to a formal Corporate Governance Code. This code was notified by Securities Exchange Board of Governance Code. This code was notified by Securities Exchange Board of India (SEBI) by inserting a new Clause 49 in the listing guidelines to theIndia (SEBI) by inserting a new Clause 49 in the listing guidelines to the Stock Exchanges making it mandatory for the listing companies to followStock Exchanges making it mandatory for the listing companies to follow the requirements of Clause 49 effective January 01, 2006. The major areasthe requirements of Clause 49 effective January 01, 2006. The major areas of compliance in Clause 49 are:of compliance in Clause 49 are:

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Appointment of required number of independent directorsAppointment of required number of independent directors

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Larger role of Audit CommitteeLarger role of Audit Committee

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CEO/CFO Certification of Accounts (will become applicable for CEO/CFO Certification of Accounts (will become applicable for 2005-06 Accounts)2005-06 Accounts)

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Code of Conduct for Board / Senior ManagementCode of Conduct for Board / Senior Management

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Risk Minimization Report to the BoardRisk Minimization Report to the Board

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Legal Compliance Report to the BoardLegal Compliance Report to the Board

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Compliance relating to Subsidiary CompaniesCompliance relating to Subsidiary Companies

CORPORATE GOVERNANCE IN CHINA AND INDIA

Indian companies with global ambitions are better governed than their Indian companies with global ambitions are better governed than their Chinese counterparts, a Harvard professor says. But in competition, it mayChinese counterparts, a Harvard professor says. But in competition, it may not matter.not matter.By:By:William J. HolsteinWilliam J. HolsteinIndian companies aspiring to become world-spanning multinationalsIndian companies aspiring to become world-spanning multinationals demonstrate better corporate governance than their Chinese rivals, saysdemonstrate better corporate governance than their Chinese rivals, says Tarun Khanna, a professor at Harvard Business School and author of a newTarun Khanna, a professor at Harvard Business School and author of a new book, book,Billions of Entrepreneurs: How China and India Are Reshaping Their Billions of Entrepreneurs: How China and India Are Reshaping Their Future and YoursFuture and Yours. But Chinese companies may not need world-class. But Chinese companies may not need world-class governance to emerge as fierce competitors, says Khanna. Here are editedgovernance to emerge as fierce competitors, says Khanna. Here are edited excerpts from a recent conversation:excerpts from a recent conversation:Much as their societies and political systems are different, are Indian andMuch as their societies and political systems are different, are Indian and Chinese Companies complete opposites when it comes to corporateChinese Companies complete opposites when it comes to corporate governance?governance?Absolutely. Indian companies are so much better governed. India is sort of aAbsolutely. Indian companies are so much better governed. India is sort of a noisier version of the U.S. system, which is that you have to be accountablenoisier version of the U.S. system, which is that you have to be accountable to shareholders and all the other stakeholders. The principles are the same,to shareholders and all the other stakeholders. The principles are the same, but the information acquisition is a little bit more problematic in India but the information acquisition is a little bit more problematic in India compared to the U.S. It's not so easy to figure out everything you need to.compared to the U.S. It's not so easy to figure out everything you need to. But there's a very vibrant, credible business media. No opinion is forbiddenBut there's a very vibrant, credible business media. No opinion is forbidden

to be expressed. Information is noisy and unbiased—no one is willfullyto be expressed. Information is noisy and unbiased—no one is willfully distorting the truth.distorting the truth.China is the opposite—it's noise-free but biased. You get a clean story butChina is the opposite—it's noise-free but biased. You get a clean story but the story isn't always right. There are views that cannot be expressed.the story isn't always right. There are views that cannot be expressed.

Which country has more independent boards of directors?Which country has more independent boards of directors?

In India, there is a spectrum of companies, such as Infosys, which on someIn India, there is a spectrum of companies, such as Infosys, which on some dimensions is better governed than companies in the West in terms of howdimensions is better governed than companies in the West in terms of how quickly it discloses things and how quickly it complies with NASDAQquickly it discloses things and how quickly it complies with NASDAQ norms. At the other end of the spectrum you have companies that are still thenorms. At the other end of the spectrum you have companies that are still the fiefdoms of families, many of which are badly governed. But even thosefiefdoms of families, many of which are badly governed. But even those companies are accountable to the market. Market pressures will force themcompanies are accountable to the market. Market pressures will force them to clean up their act to some extent. The equity markets function so well thatto clean up their act to some extent. The equity markets function so well that it's hard to believe you could be a continuous violator of norms of goodit's hard to believe you could be a continuous violator of norms of good governance and still have access to the equity markets.governance and still have access to the equity markets.

And what about China?And what about China?

None of that matters in China because the financial markets still don't work None of that matters in China because the financial markets still don't work in the sense that we think of them working in the U.S. In China, all stock in the sense that we think of them working in the U.S. In China, all stock prices move together. They move up on a given day or they move down. prices move together. They move up on a given day or they move down. There is no company-specific information embodied in the stock price. YouThere is no company-specific information embodied in the stock price. You can't possibly decide that a company is good or bad because the market isn'tcan't possibly decide that a company is good or bad because the market isn't working in that sense. What you see is aggregate enthusiasm, or lack working in that sense. What you see is aggregate enthusiasm, or lack thereof, for China Inc. The market is not putting pressure on managers tothereof, for China Inc. The market is not putting pressure on managers to behave in ways that approximate corporate governance in the West. behave in ways that approximate corporate governance in the West.